by James C. Robinson
At a recent MBA National Mortgage Servicing Conference, in a session entitled “The Rating Game”, panelists representing Wall Street rating agencies and investors discussed the impact of quality control on servicer ratings and the pricing of mortgage securities.
The first speaker was Jon Voigtman, a Managing Director at HSBC Securities USA. He gave a presentation on the investor perspective, saying that for investors in mortgage pools the servicer rating is a definite factor in pricing. He estimated that in a typical security of, say $1 billion, the cost of credit enhancement is impacted by about $2.5 million per servicer rating grade. In other words, if you improve your rating from, say, R3 to R2, or R2 to R1, you can save $2.5 million on the securitization. For a large securitizer, one who does say $20 billion per year, this could mean savings of $50 million dollars a year!
Speakers from Fitch, S & P and Moody’s then gave presentations on the methods they use in assigning their servicer ratings. Each of the rating agencies looks closely at a servicer’s quality control process, and this is an important component in their ratings. Diane Pendley, of Fitch, said their assessment of a servicer’s internal controls is a key part of their review. Stephen Frie, of S & P, said the overall question that guides their rating is “How well does the servicer control operational risk?” Warren Kornfeld of Moody’s added that the frequency and depth of quality assurance audits is important, as is the servicer’s ability to identify issues and document their resolution (as in feedback reports). He said Moody’s preference is to see ongoing monitoring – not just annual audits, and not just within the servicing departments, but by a separate, independent QC function. All agreed that the rating agency’s perception of a lender’s quality control process can have a significant influence on their overall rating.
In view of the impact servicer ratings have on the pricing of securities, and the importance placed by the rating agencies on a lender’s QC process, having a best-in-class QC process should be a top priority for all major servicers. Of course, doing a better job of managing operational quality can also bring other financial benefits to servicers, including improved efficiency, reduced losses, and better customer retention.
The Cogent ServicingQC System is a robust and statistically sound workflow application designed specifically for QC of servicing operations. If used by a well-trained, independent QC department, the ServicingQC System can make best-in-class servicing QC a reality for any servicer.